Source: Silver Springs.
Many of us are lucky: Our cities are getting make-overs. No, not in preparation for winter -- these updates transcend repairing potholes. Local and state governments are looking to usher our cities into the 21st century by converting them to smart cities. And as this process unfolds, businesses that specialize in the Internet of Things, or IoT, will reap the benefits. Let's look at three companies that are well positioned to profit.
Keep the meter running
One company at the forefront of modernizing our cities is Itron (ITRI -0.44%). Offering city planners a range of solutions, Itron has evolved significantly from its founding 40 years ago as a business solely focused on electricity meter technology. The company now offers end-to-end integrated solutions, which it characterizes as network communications, data-collection systems, meter-data management software, and other metering software applications. According to the company, its IoT-based technology platform enables solutions that "power new and better approaches to outage analysis, diversion detection, transformer loading, detection of unsafe grid conditions, and integration of renewables."
The market opportunity for the company is substantial. Research firm Frost and Sullivan estimates that the market is expected to reach $1.2 trillion by 2020. And validating its position in the industry, Frost and Sullivan named Itron as the 2014 North America Company of the Year in the smart-cities market. Reporting increases in annual bookings and backlog over the past three years, Itron has been growing nicely.
Source: Itron 2014 10-K.
Although the company's business is growing, it hasn't translated to an increase in revenue. Management attributes the problem to the timing of the completion of projects -- a common issue for companies such as Itron. Nonetheless, it is imperative for those considering a stake in the company to keep an eye on these numbers and verify that over time there's top-line growth. After all, what good is a growing backlog if it doesn't yield growing revenue?
Stepping into the light
Though Itron provides a variety of solutions, Acuity Brands (AYI -0.82%) has a much narrower focus -- lighting. With a global presence, the company offers both indoor and outdoor innovative lighting solutions. In terms of modernizing urban landscapes, Acuity has partnered with Sensity Systems, whose NetSense platform provides the foundation for its Light Sensory Network -- a network of communicating sensors that enhance energy efficiency through real-time data analytics.
Numerous applications for cities exist, such as smart parking, circuit monitoring, and lighting optimization. The partnership is in its nascent stage; the companies intend to roll out their solution to select customers by the end of the year.
Acuity is already enjoying significant success, and the prospects of grabbing a large share of the imminently booming IoT market suggest that Acuity warrants significant focus for those looking to gain early exposure to this market. In 2014, the company reported record net sales of $2.4 billion -- a 15% increase compared with fiscal 2013. Moreover, the company reported record operating profit and record net income. All of this translated to -- you guessed it -- a record bottom line. The company reported diluted earnings per share of $4.04, a 37% increase compared with fiscal 2013.
A smart-city silver bullet
Unlike Itron and Acuity, Silver Spring Networks (NYSE: SSNI) is a pure play in the smart-city market. The company's networking platform provides the foundation on which a smart city infrastructure can be built. For example, the company recently announced a partnership with Acuity to develop an intelligent lighting system for cities. This alone is a substantial market. According to the company's press release, older street lights can account for up to 40% of a city's energy budget, but by "networking upgraded LED luminaires, cities can lower costs by as much as 60% by reducing energy expenses and increasing operational efficiency."
Source: Silver Springs.
The company also has a global reach. In April, it announced a deal to network the street and traffic lights in Paris -- an impressive deal for the place dubbed the "City of Lights." Silver Springs has provided solution for a number of famous cities worldwide, including Copenhagen, Sao Paolo, Melbourne, and Singapore, to name a few.
The company is an industry leader, but investors should exhibit some caution before picking up shares. The company only went public in 2013, so consequently, there aren't substantial previous results with which we can compare current financial results. In fiscal 2014, the company reported GAAP revenue of $191.3 million -- a whopping 41% lower than what it reported in 2013. Its non-GAAP revenue provides a less painful amount of $276.7 million, which is only a 20% decrease over fiscal 2013, but the company is guiding for non-GAAP revenue between $270 million and $290 million. Should it hit the middle of this range, it would yield, essentially, flat revenue growth. This is concerning but fairly understandable -- the company is operating in a industry that is only in the beginning stages of its development. One other metric to keep an eye on is its backlog growth. Silver Springs reported 5% growth in its fiscal 2014 backlog compared with fiscal 2013. A promising indicator of the company's success would be stronger growth in its backlog.
Final Foolish thoughts
Like any burgeoning industry, the Internet of Things is going to have its share of winners and losers, and despite the enthusiasm it inspires, investors should understand the associated risks. Perhaps the safest play among the three companies is Acuity. The company's $8.7 billion market cap and trailing-12-month EPS of $5.09 suggest that it can survive the volatility that the realization of the smart city market will surely present.
